DTCC Connection

Absorbing Today’s Fintech Wave

By Michael Bodson, DTCC President and CEO

At the World Economic Forum last week, discussion of the U.S. Presidential election results was inescapable, while a common theme running more broadly through the dialogue was the issue of disruption and transformation.

This is occurring in virtually all aspects of our lives – from the geopolitical shifts reshaping Europe and the United States to new technologies that are forcing changes in long-existing operating models across business sectors. I had the opportunity to participate in three separate panels while at Davos, each focusing on the impact of fintech on financial services.

While it’s true that banking is rapidly transforming due to new technologies, the reality is that this is simply a continuation of a long history of financial services adapting to innovation. For example, the creation of DTCC 40-plus years ago was rooted in this phenomenon. At the time, we replaced the physical delivery of securities certificates and checks with a computerized system that allowed us to centralize and de-materialize these assets. This doesn’t sound very revolutionary today, but in the 1970s it was a bold step into the future.

Each decade seems to usher in the next technological wave – from the rise of the Internet, the advent of massive data storage solutions and superfast data transmission in the 1990s to electronic bill payment, big data, high frequency trading and streaming on-demand movies a few years later. Today, we are wrestling with the challenges of digital currencies, distributed ledgers, cloud and quantum computing, cryptography and machine learning.

These innovations, coupled with the emergence of many new non-traditional players, are reshaping our industry and disrupting the long-standing relationships between banks and their clients. Not surprisingly, many incumbents are rethinking their operating models and strategies to remain competitive. And regulators are re-examining their approach because the questions and answers are not as clear as they have been in the past.

From my vantage point as a user and target of fintech, I have a unique perspective on the opportunities and challenges that lie ahead. Using blockchain as an example, a top priority is the need for the industry to forge consensus around a core set of standards and defined opportunities for future solutions – many of which are focused on the post-trade space. However, most firms are exploring how to leverage this consensus technology individually – the ultimate contradiction.

An undertaking as significant as reimagining the global post-trade ecosystem demands an unprecedented degree of collaboration across stakeholders. It would be a missed opportunity if the many players in this effort are unable to coalesce around a common approach because the result would be the creation of a new and disconnected maze of distributed ledger siloes. And these siloes would be based on different standards and with significant reconciliation challenges—essentially the same issues we have with today’s infrastructure.

In an industry long on competitive drive and short on cooperative spirit, senior leaders in finance need to look beyond the short-term benefits they may accrue as a first-mover and instead work in partnership with their peers to build a more efficient and lower cost financial infrastructure.

In addition, we must increase cooperation and transparency between regulators and those they regulate. To their credit, regulators around the world have taken up the fintech banner. However, the industry needs to appreciate that supervisors have a delicate balancing act when dealing with innovation.

On the one hand, rules must facilitate and support technological advancement. But those goals should not overtake other important policy objectives, such as risk mitigation, investor protection, resiliency and transparency. In financial services, use of new technology that fails to ensure these goals is only a Pyrrhic victory for progress. Determining the tipping point in that balance is one of those key questions regulators must grapple with in the years ahead.

In the U.S., the Securities & Exchange Commission continues to gather experts to explore issues around fintech while CFTC Commissioner Chris Giancarlo has likened blockchain to the development of the Internet, suggesting that regulation should be modeled after the Hippocratic Oath of “first, do no harm.” Elsewhere in the world, we are seeing supervisors take an even more structured approach – from the Financial Conduct Authority’s Project Innovate and Innovation Hub in the U.K. to the Monetary Authority of Singapore’s FinTech Innovation Lab. These efforts encourage local fintech innovation and establish groups to support the development of strategies and regulation around the growing use of technology in financial services.

Of course, decisions about how to approach compliance become more complex when firms and activities subject to regulation begin to use new technologies. At the most basic level, regulators need to answer the question of what is being regulated. Is it technology, data, assets or people? Is it all of these things or a combination? And if what sits between the two sides of a transaction is no longer a company but simply a piece of technology, what and who do you regulate?

Innovation has been going on since our earliest days, but there’s something that feels different about what’s happening today – something that makes it unlike the transformations of the past. Regardless, progress will continue. It is our responsibility to work together to shape this change and to always keep market safety and stability at the center of our efforts.

This opinion piece by Mike Bodson originally appeared in Linkedin Pulse.